Current Issues in Accounting

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Current Issues in Accounting Auditing

• Governmental Not-for-Profit Organizations

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Topics to Discuss

• GFOA vs. GASB
• Financial condition
• Federal, state, local
• NFP reform
• Senate Finance Committee
• Governance
• The cascade of SOX
• Form 990
• Rescission of the Tower Amendment
• Accounting issues affecting NFPs
• Single Audit quality

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GFOA vs. GASB
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History of the GASB

• Financial Accounting Foundation
• Trial run beginning 1984
• First 5-year review 1989
• Recognized standard setter for governmental
  accounting reporting - GAAP
• SLGs only

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History of the GASB

• GASBs historical standard setting approach
• Financial reporting only one way to demonstrate
  accountability
• Broad based approach to standard setting
• User needs decisions they need to make

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History of the GASB

• Financial reporting GASB style
• Financial statements
• Other financial reports
• Special purpose reports
• Debt offering documents
• Budgets
• External grant reports
• Other non-financial information

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History of the GFOA

• Established in 1906
• Professional membership organization
• Mission enhance promote professional
  management of governments
• Active role in supporting creation of GASB
• Annually publish the GAAFR
• Aka Blue Book
• Establish CAFR requirements

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History of the GFOA

• Work with GASB other member groups
• Commenting on EDs
• GAAFR
• Advisory role re standard setting

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The Beginning of the End

• GASB today
• Mission
• Improve governmental accountability through
  better financial reporting
• Perceived role in general external financial
  reporting
• Long term projects
• Economic condition/SEA
• Derivatives
• Conceptual framework
• Concepts statements

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The Beginning of the End

• GASB today
• Significant reliance on user community for input
  re needed standards
• Composition may not be representative
• Limited discussions with preparers in some cases
• Response to GFOA

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The Beginning of the End

• GFOA taking issue with GASBs direction
• GASB 44 inclusion of operational information
• GASB has completed original assigned tasks
• Seeking creative new outlets for standard setting
  rather than taking maintenance approach

12
The End May be Near

• GFOA taking issue with GASBs direction
• Support of 7 major public interest groups
• All led to 12/06 Board decision to look at FASB
  as SLG standard setter
• Reality of FASB as standard for SLGs

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GFOA vs. GASB

• Round 1
• GFOA Board position
• Meeting with FAF April 2007
• Round 2
• June 2007 FAF letter to GFOA
• Round 3
• July 2007 Bond Buyer publishes FAF letter re
  GFOA comments
• Round 4
• GFOA Board position re FASB

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Governmental Financial Condition

• Federal, State Local

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Federal Financial Condition

• GAO reports
• Sustained improvement in financial management
  crucial to accountability fiscal stewardship
  challenges
• Federal liabilities, net social insurance
  commitments other fiscal exposures
  significantly exceed GDP
• Four years reporting current fiscal path as
  unsustainable tough choices needed

16
State Financial Condition

• GAO large growing fiscal challenges to emerge
  within next few years
• Major driver growth in health care costs
• Medicaid employees
• Pressure from federal government
• Slowing economy
• Income tax
• Sales tax
• Unfunded liabilities
• Pensions OPEB

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State Local Financial Condition

• Increasing demands for services
• Current long term
• Health care
• Education
• Transportation growth states

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Local Financial Condition

• GAO large growing fiscal challenges to emerge
  within next few years
• Major driver growth in health care costs
• Pressure from states
• Florida Amendment 1
• Trickle down effect of slowing economy
• Real property values
• Unfunded liabilities
• Pensions OPEB
• Pollution remediation liabilities

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NFP Reform

• Governance Form 990

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IRS Concerns

• The proliferation of credit counseling
  organizations
• Compensation issues
• Terrorist financing charities

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IRS Concerns

• Abuse involving tax exempt accommodation parties
• Misuse of tax exempt entities by donors and
  investors
• In-kind donations to charities

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Senate Finance Committee 2004 Discussion Draft
Proposed Reforms

• Exempt status reforms
• Insider disqualified person reforms
• Grants expense reforms
• Federal-state coordination of actions
  proceedings
• Improve quality scope of Forms 990 FS

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Senate Finance Committee 2004 Discussion Draft
Proposed Reforms

• Public availability of documents
• Encourage strong governance best practices for
  TEOs
• Funding of exempt organizations for state
  enforcement education
• Tax court equity authorities, private relator
  valuation

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Senate Finance Committee 2004 Discussion Draft
Proposed Reforms

• Auditor rotation
• Mandatory certifications on Form 990
• Board
• CEO
• CFO
• Auditor
• Federal penalties for breach of fiduciary duties

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Discussion of Key Proposals

• Five-year reviews of tax exempt status by IRS
• Required certification by CEO
• Standards for filing
• Independent audits or reviews
• Disclosure of FS
• Compensation

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U.S. Senate Finance Committee Hearing (April 2005)
Senator Grassley also stated that "It's my hope
that in the near future the Finance Committee can
move legislative reforms that will strengthen
charitable governance and address this part of
the tax gap
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U.S. Senate Finance Committee Hearing (October
2005)

• Senator Grassley
• Accounting firms DOJ
• Lack of concern by NFPs re scandals
• Charitable deductions non cash items

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NFP Governance Reforms

• Cascade of SOX

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Brief History of SOX

• Response to audit failures
• Paul Sarbanes, MD Michael G. Oxley, OH
• S 2673 The Public Company Accounting Reform
  Investor Protection Act
• Senate Banking Committee approved 6/02
• HR 3763 Corporate Auditing Accountability,
  Responsibility Transparency Act of 2002
• Signed 7/31/02
• Rapid passage of legislation

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Drivers Toward SOX in NFPs

• SOX in other states
• California NY
• Senate Finance Committee report
• IRS
• Donor advised funds
• Contributions
• Compensation
• National scandals
• Audit quality
• GAO, OMB, peer reviews

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NFP Governance Reforms

• 990 Reforms

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990 Reforms

• Draft reforms issued fall 2007
• First complete overhaul since 1979
• To be effective for 2008 returns
• No dollar thresholds for new requirements

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990 Reforms

• Reason for reforms
• Directed by Senate Finance Committee May 2007
• IRS basis for redesign
• Enhancing transparency
• Promoting tax compliance
• Minimizing burden on filing organization

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990 Reforms

• Significant reforms
• Ratio of officer, director, trustee, key employee
  compensation to program expense
• Reporting of compensation for former key
  employees still receiving compensation from
  reporting organization
• Questions re how compensation determined for key
  employees

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990 Reforms

• Significant reforms
• Conflict of interest information for officers,
  directors, trustees, key employees within past
  five years
• Asks if governing body reviewed return prior to
  filing
• Question re how organization makes audited FS
  publicly available

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990 Reforms

• Significant reforms
• Breakdown investment gains between gross sales
  cost
• Realized unrealized
• Separate reporting of travel or entertainment
  expenses paid for federal, state, local public
  officials
• Recasting FS data into non GAAP categories
  subcategories

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990 Reforms

• Significant reforms
• Certain information related to activities outside
  the US
• Question re relationship between beneficiaries
  organization
• Any donor, officer, director, trustee, creator,
  HCE, or selection committee member
• Beneficiaries individuals or organizations

38
990 Reforms

• Significant reforms
• Supplemental info re fundraising activities
• Compensation details for officers, directors,
  trustees, key employees, HCEs
• Report value of all fringe benefits to certain
  individuals/employees

39
990 Reforms

• Significant reforms
• Disclosure of nontaxable expense
  reimbursements/allowances for certain individuals
• Report number of 8283 forms (appraisal of donated
  items) where organization completed Donee
  Acknowledgement section
• Only required if donor wants to take charitable
  contribution deduction

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990 Reforms

• Significant reforms
• Elimination of consolidated Form 990
• Require advance IRS approval for accounting
  changes

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Rescission of the Tower Amendment
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Status of the Tower Amendment

• Muni securities exempt under 1933 1934 Acts
• Registration not required
• Periodic disclosure not required
• Muni brokers/dealers not exempt under Acts
• MSRB regulates brokers/dealers but not issuers
• Rule 15c2-12

43
Status of the Tower Amendment

• What is the Tower Amendment - 1975
• Prevents SEC MSRB from imposing corporate-style
  registration requirements on muni issuers

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Status of the Tower Amendment

• SEC initiatives
• Christopher Cox
• Orange County, CA
• San Diego
• Maricopa County, AZ
• Miami, FL
• Impact to SLGs
• Speed bringing bonds to market
• Cost of bond issuance

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Accounting Issues Affecting Not-for-Profit
Organizations
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SFAS No. 157 Fair Value Measurements

• Effective YB after 11/15/07
• Defines FV
• Price (received/paid)
• Orderly transaction
• Between market participants
• Measurement considers attributes or A/L
• Condition, location, restrictions, etc.

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SFAS No. 157 Fair Value Measurements

• FV assumptions
• Highest best use of assets
• Liabilities transfer at measurement date
  nonperformance risk does not change
• Transaction price initial FV

48
SFAS No. 157 Fair Value Measurements

• Valuation techniques
• Market approach
• Income approach
• PV techniques
• Option-pricing models
• Black-Scholes-Merton formula
• Binomial model
• Lattice model
• Cost approach

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SFAS No. 157 Fair Value Measurements

• Inputs to valuation techniques
• Assumptions used in pricing
• Observable based on market data
• Maximize these
• Unobservable based on own assumptions
• Minimize these

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SFAS No. 157 Fair Value Measurements

• FV hierarchy
• Level 1 inputs
• Quoted prices, active market, same
• Level 2 inputs
• Those other than quoted prices included in Level
  1
• Level 3 inputs
• Unobservable inputs
• Inputs based on bid-ask prices
• Use price within most representative of FV in the
  circumstances

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FIN No. 48Uncertainty in Income Taxes

• Effective years beginning after 12/15/06
• Non public companies deferred one year
• Clarifies SFAS No. 109
• Provides recognition measurement of tax
  positions (per SFAS No. 109)
• Taken in a tax return
• Expected to be taken in a tax return

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FIN No. 48Uncertainty in Income Taxes

• Tax position encompasses
• Decision not to file
• Allocation/shift of income between jurisdictions
• Characterization of income or decision to exclude
  reporting taxable income
• Decision to classify transaction, entity, or
  other position as tax exempt

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FIN No. 48Uncertainty in Income Taxes

• Step 1 - recognition
• More likely than not (50) position will be
  sustained upon examination
• Including appeals and/or litigation
• Based on merits of position
• Presume position will be examined
• Consider facts, circumstances, info at report
  date

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FIN No. 48Uncertainty in Income Taxes

• Step 2 - measurement
• Largest amount of benefit greater than 50 likely
  of realization on ultimate settlement
• Include effect of interest penalties
• Classify interest as either interest or income
  tax expense
• Classify penalties as either income tax or other
  expense
• Must be consistent

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FASB Activities

• Codification project
• Released 1/15/08
• Includes ALL standards issued
• Levels A-D
• Includes AA guides, EITFs, etc.
• 90 topic areas
• SEC guidance to follow similar topical structure

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FASB Activities

• Codification project
• One year verification phase
• On-line research system free
• http//asc.fasb.org
• Authoritative single source for US GAAP after
  verification phase
• International convergence
• May 2008 AICPA Council action
• SEC actions

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Single Audit Quality
58
National Project Statistical Measure Audit
Quality

• Reasons
• 2000-2003 24 SAs had audit quality problems
• QCRs judgmental
• Results not statistically reliable
• Results of
• Desk reviews
• IG QCRs
• Peer reviews

59
National Project Statistical Measure Audit
Quality

• Players
• OMB
• 7 US departments (not DOD)
• Advisory Board
• 7 federal senior execs
• 3 state auditors
• In liaison with
• AICPA, GAO, NSAA (state auditors)

60
National Project Statistical Measure Audit
Quality

• Sampling plan
• FAC submissions for 1 year (4/1/03-3/31/04)
• Excluding less than 500K
• Statified
• Below 50 million
• Universe 37,671, QCR 112
• 50 million
• Universe 852, QCR 96
• 208 audits selected from universe of 38,523
• QCRs by Federal OIG outsourced to public
  accounting firms

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National Project to Measure Quality of Single
Audits

• Status of project
• QCRs conducted
• 10/03-3/07
• Results compiled
• Overall report issued 6/07
• www.aicpa.org/gaqc
• GAO testimony to Congress 10/07

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National Project to Measure Quality of Single
Audits

• Overall results
• 115 (48.6) acceptable reliable
• 92.9 of federal awards reviewed
• 30 (16) significant deficiencies limited
  reliability
• 2.3 of federal awards reviewed
• 63 (35.5) unacceptable no reliance
• 4.8 of federal awards reviewed

63
National Project to Measure Quality of Single
Audits

• Stratum I results
• 61 (63.5) acceptable reliable
• 93.2 of Stratum I federal awards reviewed
• 12 (12.5) significant deficiencies limited
  reliability
• 2.2 of Stratum I federal awards reviewed
• 23 (24) unacceptable no reliance
• 4.6 of Stratum I federal awards reviewed

64
National Project to Measure Quality of Single
Audits

• Stratum II results
• 54 (48.2) acceptable reliable
• 56.3 of Stratum II federal awards reviewed
• 18 (16.1) significant deficiencies limited
  reliability
• 9.6 of Stratum II federal awards reviewed
• 40 (35.7) unacceptable no reliance
• 34.1 of Stratum II federal awards reviewed

65
National Project to Measure Quality of Single
Audits

• Most prevalent deficiencies
• Not documenting understanding of IC over
  compliance requirements
• 27.1 Stratum I, 57.1 Stratum II, 56.5 overall
• Not documenting testing IC of at least some
  compliance requirements
• 34.4 Stratum I, 61.6 Stratum II, 61 overall

66
National Project to Measure Quality of Single
Audits

• Most prevalent deficiencies
• Not documenting compliance testing of at least
  some compliance requirements
• 47.9 Stratum I, 59.8 Stratum II, 59.6 overall

67
National Project to Measure Quality of Single
Audits

• Major recommendations
• Revise improve single audit standards, criteria
  guidance
• Specific documentation requirements
• Examples of proper documentation based on real
  compliance requirements situations
• Amend OMB AICPA guidance to require compliance
  testing using sampling per SAS 111

68
National Project to Measure Quality of Single
Audits

• Major recommendations
• Establish minimum requirements for training on
  performing SAs
• Comprehensive training as prerequisite for
  conducting SAs
• 16-24 hours
• CPE providing current info as prerequisite for
  continuing to perform SAs
• 16-24 hours
• Specific content to be covered in each

69
National Project to Measure Quality of Single
Audits

• Major recommendations
• Review enhance processes to address
  unacceptable SAs
• Review suspension debarment process for
  efficiency effectiveness of application to
  unacceptable audits
• Dialogue with BOAs AICPA to identify
  implement ways to further audit quality address
  due professional care

70
National Project to Measure Quality of Single
Audits

• Major recommendations
• Review enhance processes to address
  unacceptable SAs
• Identify, review evaluate potential
  effectiveness of other ways to address
  unacceptable audits
• Revise A-133 to include auditor sanctions
• Potential legislation to provide fines available
  to federal cognizant oversight agencies

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National Project to Measure Quality of Single
Audits

• GAO testimony 10/25/07
• Jeanette M. Franzel
• Financial Management Assurance Director
• Quality of single audits been a concern since SAA
  of 1984
• PCIE report compelling evidence that a serious
  problem with single audit quality continues to
  exist